Mezzanine Finance vs Stretch Senior Debt

The choice between mezzanine finance and stretch senior debt comes down to three things: how much debt the developer needs relative to project cost, what structures are available from the lender market for the specific scheme, and whether the total cost of a two-lender stack is lower than a single stretch senior facility. Neither is universally better — the right answer is deal-specific.

What Both Solve

Both mezzanine finance and stretch senior debt allow developers to fund 80–85% of total project costs through debt, rather than the 65–70% available from standard senior debt. A developer targeting 15–20% equity contribution has two routes to that leverage:

1. Standard senior (65% LTC) + mezzanine (bridging the gap to 82% LTC): two lenders, two sets of fees, first and second charge
2. Stretch senior (82% LTC from one lender): single lender, single charge, one set of documentation

The Cost Comparison

Mezzanine stack:
– Senior debt rate: lower (e.g. 1.0% per month on the first 65% LTC)
– Mezzanine rate: higher (e.g. 2.0–2.5% per month on the top-up tranche)
– Two arrangement fees, two sets of legal costs, potentially two monitoring surveyors
– Inter-creditor agreement required between senior and mezzanine

Stretch senior:
– Single rate applied to the full 82% LTC (e.g. 1.3–1.5% per month)
– One arrangement fee, one set of legal costs, one monitoring surveyor
– No inter-creditor agreement

For most SME-scale schemes, stretch senior is simpler and often cheaper in total — particularly because two sets of arrangement fees, legal costs, and monitoring fees can easily exceed the rate saving on the senior tranche. The maths changes on larger deals where the senior debt tranche is very large and the rate differential justifies the additional complexity. [EDITORIAL JUDGEMENT — model the specific deal]

Structural Considerations

Mezzanine may be necessary when:
– No stretch senior lender is available for the specific scheme type or geography
– The senior lender is fixed and does not offer stretch products
– Leverage above 85% LTC is needed (mezzanine stacking above stretch senior is possible in theory but unusual)

Stretch senior is generally preferable when:
– It is available for the scheme type from a competitive lender
– Speed of execution matters — fewer parties means faster completion
– The project is at the smaller end of the development finance market where mezzanine fund minimums may not be met

Developer Perspective

From a developer’s perspective, the cleaner route is stretch senior. Less legal complexity, fewer parties to manage, single point of contact on the debt. The mezzanine route introduces additional counterparty risk — the mezzanine lender is also a creditor, with specific rights that need to be respected throughout the project.

Mezzanine is typically used because it is the only practical route to a given leverage level, not because it is preferred in isolation. [EDITORIAL JUDGEMENT]

Key Questions for the Decision

1. Is stretch senior available from a credible lender for this scheme? If not, mezzanine is the only option.
2. What is the total all-in cost (rate + all fees) for each structure? Run the numbers for the specific deal.
3. Does the mezzanine fund have a minimum deal size above the mezzanine tranche required?
4. Is the senior lender willing to consent to a second charge mezzanine? (Usually yes for development finance, but confirm.)

Related Pages

• Mezzanine Finance
• Stretch Senior Debt
• Ground-Up Development Finance
• Development Finance Costs Explained